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GSK Consumers: First cut - Views on News from Equitymaster

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GSK Consumers: First cut
Apr 25, 2008

Performance summary
  • For 1QCY08, the topline grows by 26% YoY.

  • Margins improve to 19.4% on account of lower labour and other expenses.

  • Higher other income and lower depreciation leads to the bottomline growth of 34% YoY.

Rs m 1QCY07 1QCY08 Change
Net sales 3,265 4,106 25.8%
Expenditure 2,641 3,309 25.3%
Operating profit 624 797 27.7%
Operating margins (%) 19.1% 19.4%  
Other Income 139 186 33.8%
Interest (net) 11 13 18.2%
Depreciation 108 106 -1.9%
Profit before Tax 644 864 34.2%
Tax 221 298 34.8%
Profit after Tax/(Loss) 423 566 33.8%
Net profit margin (%) 13.0% 13.8%  
No. of Shares (m) 42.1 42.1  
Diluted Earnings per share (Rs)*   42.1  
Current P/e ratio   15.3  
*12 months trailing earning

What has driven performance in 1QCY08?
  • GSK Consumer’s topline grew by strong 26% YoY in 1QCY08 led by 17% YoY volume sales growth and 9% YoY price hikes. The volume sales include 2% to 3% pipeline stock correction which it takes every year in the December quarter. GSK had taken 3 price hikes in April and June last year and another one of 4% in Jan 08. ‘Boost’ and ‘Horlicks’ continued with their strong performance and witnessed a 20% YoY growth across all regions. The company also launched 2 new products in the quarter, ‘Women Horlicks’ and ‘Actibase’. Though their current contribution is not known, off take was good during the quarter. The company is looking at introducing 2 new products/variants in 2HCY08 and 3 products in CY09. It is also targeting the bottom of the pyramid where the current penetration level is low.

    As a % of net sales 1QCY07 1QCY08
    Total Cost of goods 35.7% 37.6%
    Staff Cost 10.7% 9.4%
    Advertising 13.2% 13.5%
    Other Expenditure 21.3% 20.1%

  • The operating margins remained stable in 1QCY08. Raw material costs (as percentage of sales) increased from 35.7% in 1QCY07 to 37.6% in 1QCY08. The basic input costs continued to rise by average 15% in the quarter. Going forward, the company expects the agri products price to increase, while milk prices may reduce marginally. Overall, the input prices would continue to worry. Also, the company expects the ad spends to increase on account of its new launches. This would reduce its margins going forward.

  • The net profits were up by 34% YoY. Stable margins, higher other income and lower depreciation led to the growth.

What to expect?
At the current price of Rs 645, the stock is trading at a multiple of 12.2 times our CY09 earnings estimates. The company is launching new products and also expanding its capacities. While it expects the category volumes to grow by around 6%, decision regarding price hikes is not yet confirmed. It is looking at increasing the penetration and per capita consumption. However, the market segment is getting crowded with existing palyers getting aggressive and new players like HUL and Dabur entering. Also, the company would face margin pressures on most of the inputs, including packaging and media spends. While the company is confident of maintaining the market share, the growth of existing and new product launches would be the key factor.

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